Posts Tagged ‘accountants’

When “What If?” Becomes “What Now?”…

Tuesday, September 4th, 2012

 

This week’s guest is Howard Lerner, Partner at SBLR LLP Chartered Accountants, a full-service accounting and business advisory firm located in mid-Toronto.  With 9 partners and over 40 team members, including a strategic tax department, SBLR specializes in providing creative income tax solutions and high-level growth and exit strategies for profitable, privately-held companies.

 

One of the most important – but often ignored – reasons for preparing for the future succession of your business is to minimize the fallout from the unexpected.  While things don’t always go according to plan, the business has a much better chance of surviving if you’ve made preparations, in advance, for it to continue without you there.

The following is based on an actual story, illustrating the importance of planning ahead.  In a real-life situation, Karen, 56, started Staywell Corp, a health services business, 23 years ago. Her son John, 27, and daughter Beth, 24, have worked in the business since graduating from university.

Karen recently contracted a life-threatening virus leaving her paralyzed and unable to work.   Not having developed a strong senior management team, much of the business knowledge resided with Karen.  With the help of a few loyal employees, Karen’s children kept things together for several months, hoping in vain that their mother would quickly return to work.

Karen and her family never discussed what would happen in case of a tragic event, so John and Beth were completely unprepared for the responsibility resulting from their mother’s lengthy absence.  After six months of declining sales, John and Beth realized it was necessary to sell the business. The value received for Karen’s shares was substantially less than it should have been, as much of the intellectual capital was tied up with her.  The proceeds still resulted in a taxable capital gain to Karen of $1.2 million, thereby costing her family $110,000 in capital gains taxes.

After the sale, John and Beth left the company; only one has since found new employment.  Karen’s disability insurance, a fraction of her former CEO’s salary, means the family is struggling financially, as Karen needs full-time nursing care, and the after-tax proceeds were used to pay down debt.

How could this family have experienced a better outcome?  The answers all have one thing in common:  PLANNING.

1. Succession Planning – Karen could have developed a strong and capable management team and delegated as much responsibility as possible to the team, with the objective of making herself redundant to day-to-day operations.

2. Insurance Planning – At least bi-annually, life and disability insurance policies could have been reviewed to provide adequate coverage in case of death, illness, or disability.  Insurance strategies can often include funding the premiums using corporate assets certain situations.  This planning also involves the preparation and updating of proper wills and powers of attorney.

3. Tax Planning – A proper corporate structure also might have allowed Karen to multiply the Capital Gains Exemption on the sale of Staywell Corp’s shares, possibly eliminating all of the $110,000 of capital gains tax.

4. Exit Planning – Karen could have been developing and communicating her plans for the business, so that the key stakeholders (her family and senior management) would know and understand Karen’s wishes and how to execute them in case of disability or sudden death (yes, that happens, too).

5. Financial Planning – a solid financial plan could have established family assets in addition to the business investment, making the group less reliant on Staywell Corp for support.  Debts could have been managed to maximize interest deductibility.

Karen and her family have a tough road ahead of them but their situation offers an important lesson to the rest of us. Call your trusted advisors today and put some plans in motion to mitigate the implications of unexpected yet potentially disastrous situations.  After all “What if” can often turn into “What now?” but with a phone call or two, you can avoid that.

For more information, please contact Howard Lerner at SBLR LLP Chartered Accountants at 416-488-2345 Ext. 222 or at hlerner@sblr.ca

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Focus On The Drivers And Get The Best Price!

Tuesday, January 11th, 2011

Last month I talked about increasing the value of a company being an output of executing a strategy/ running a company, well. (See Selling Price of Your Company – Goal or Output?)

This week I had the opportunity to speak to a group of accountants, lawyers and financial planners about how business owners view their companies as an asset for retirement. As it turned out, I couldn’t do the talk because I was sick (hopefully they’ll invite me back).

But here are some of the points I was going to cover.

In our experience getting entrepreneurs to focus on building value in their companies can be difficult. Many assume that they’ll only have to think about selling 6 or 9 months before they retire – ignoring several reasons why a sale may occur well before then.

For example, someone from a larger competitor could walk in one day and make the owner an offer. We see this in industries which are consolidating or when our client has intellectual property, or some other asset, the larger competitor considers to be strategic.

It’s also not unknown for one principal in a partnership to trigger a shotgun clause either in an effort to buy out the others or because he/she is ready to move on.

So, as service providers – consultants, accountants, lawyers, financial planners – it falls on us to make our clients aware of these potential surprises.

It’s purely an observation on our part but younger entrepreneurs appear more focused on the price for which they can ultimately sell their companies. As are those owners who have attracted angel or other investors.

The former want to fund another, more relaxed lifestyle and have a relatively short time frame before cashing out. The latter realize that a liquidity event is a certainty at some point in the not too distant future.

The value of most companies – including those purchased for so called strategic reasons – is a function of the size and continuity of the future stream of operating income they will generate.

To get the best price for the company the seller has to demonstrate, particularly during due diligence, that;

  • The drivers of great operating profits are in place and that
  • They will continue to produce those profits after the current owner rides off into the sunset either immediately or after a transition period. 

I talked in my earlier post about those drivers falling into 2 categories – the ones the owner can control and the ones he/she can’t.

Many service providers know from training, experience or both what those drivers are. And they share them with their clients, particularly if the accountant, lawyer or other professional believes there’s room for improvement.

But that advice/input may not be taken.

Why? There are 3 reasons.

First, the service provider may not be able to tell their client/the owner how to put the drivers in place. Second, if the owner knew how to put them in place he/she would have done so already. And third, there may not be enough time to get all of them fully implemented.

There is a solution for the first two. Consultants with the relevant knowledge and experience will work with owner to put the missing links in place. We’re certainly not the only firm who can do this but, if you want to know how it would be done, give me a call and I’ll be happy to give you some examples.

But the solution to the third lies solely in the hands of the owners – including younger entrepreneurs (investors tend to take care of their own). It can take as much as 2 or 3 years to prepare/optimize a company for sale. But it needn’t. The things that will bring the best price are the same things that will optimize operating profits this year and next year. 

If they aren’t in place now why wouldn’t they be put in place – now?

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